Oil Tumbles as Speculative Interest Drops, Gold Curbed by Quiet Confidence

North American Commodity Update

Commodities - Energy

Speculative Confidence in Crude Tumbles According to COT Data

Crude Oil (LS Nymex) - $74.34 // -$0.68 // -0.91%

US-based oil would see its impressive bullish reversal hit a wall Friday despite a steady climb in risk appetite seen across other speculative-based asset classes. The first decline for crude in three days would develop on the same day that the S&P 500 rallied for a fourth consecutive session and tested levels not seen since August 11th. Investor confidence was bolstered by the big-ticket release of the monthly US employment statistics. And, though the data’s promise is suspect; the prevailing trend for the week and quickly evaporating liquidity into the weekend would keep the market bid. In contrast, the Nymex-based crude futures contract would find itself capped by a solidifying range of congestion. If we consider the fundamentals behind this market, this stalled progress shouldn’t surprise.

This past week, the long-term supply and demand qualities of the energy market were put into perspective. From the supply side, the Department of Energy reported that total US petroleum stockpiles rose to its highest level in at least twenty years (1.14 billion barrels) while refineries ran at 87 percent of capacity (the lowest level since April). There is a clear glut and spare room for production; if only there were enough demand to absorb the output. Instead, the global economy seems to be on pace to slow in its recovery from the worst economic slump since World War II. This is the big picture we are left to reflect upon when we take in comparatively minor fundamental updates like those seen over the final 24 hours of trading. Market specific on Friday was the dissipation of a risk premium built up over the previous session on the belief that the Mariner platform explosion in the Gulf of Mexico would develop into BP-level disaster and perhaps encourage regulation. Yet, the fallout from this episode has yet to truly threaten such concerns. In the meantime, the macro event risk on the calendar would first lead to a tentative boost in growth forecasts from a modestly-better-than-expected NFPs reading (sparking a $1.15 intraday rally) that was then more than erased (with a $1.70 tumble) with the slip in the ISM’s service sector report. Looking ahead to next week, the US exchanges will be closed on Monday for the Labor Day holiday. Beyond this, there is very little in the way of major event risk through the rest of the week.

Not to be lost on intraday fluctuations, speculative positioning has revealed a very big shift in confidence recently. The CFCT’s Commitment of Traders report revealed net speculative long interest in the week through August 31st plunged 52 percent (to 13,120) to the lowest level since July 2009. At the same time, risk premium is rising as the one-year contango (the difference between the active and 12 month deferred contracts) is at its highest level since May 20th ($8.13) and rising.

Crude Futures Chart (Daily)

Chart generated usingFXCM Strategy Trader

Commodities - Metals

Gold Within Reach of Record Highs as Fundamental Fuel Dries Up

Spot Gold - $1,246.75 // -$4.20 // -0.34%

With risk appetite slowly building, there was a natural resistance for gold to overcome as the favored safe haven asset. However, it wasn’t necessarily a rise in sentiment that would hurt the commodity (indeed we have seen it progress despite the strength for equities and other risk-based asset classes on a number of occasion recently). Instead, gold’s real stumbling point was the quickly fading speculative interest into the end of the week. The rush towards the weekend liquidity drain was amplified by the knowledge that the US markets would be closed through Monday for a national holiday that would likely leave the electronic market directionless without the stabilizing effect of institutional capital. That being said, the precious metal’s slip through the week’s closing session wouldn’t through off its large trend. The impressively consistent (if controlled), five-week trend has weathered significant swings in other speculatively-based asset classes and a distinct reduction in sentiment extremes.

As for Friday’s fundamental developments, the data’s long-term impact on growth and financial conditions has to be properly assessed in order to establish its influence over gold. For the ever-exciting US nonfarm payrolls report, the net 54,000-person contraction in the headline figure was better than expected – as was the 67,000 net growth in private payrolls. However, if this were an update on the recovery; the unemployment rate had ticked back up 9.6 percent (not far from a 26-year high) and the approximately 723,000 jobs added so far this year have barely made a dent in the 8.4 million lost through the Great Recession. There is little here to suggest that a rebound in capital is anything more than a climb in risk appetite – when a robust recovery in growth and capital flow is needed to truly encourage investors from safe havens.

For positioning, the active December Comex futures contract actually climbed from Thursday to mark a 101,517-contract turnover (just above the monthly average). Reflecting the steady build in holdings, aggregate open interest rose to its highest level since July 2nd. A similar reading was presented with the COT figures as net speculative long interest grew 8 percent a similar high of 238,077 contracts. It’s worth noting that the recent series of weekly increases in speculative interest has been the sharpest since May of 2009. Attempting to isolate the highly sensitive speculative set, SPDR Gold shares show volume that is still very low (9.076 million shares). The extended slump in activity resembles the lulls this past April and August of last year.

Spot Silver - $19.89 // $0.24 // 1.20%

The stand out performance for the commodity market Friday was silver’s rally. While the commodities 1.2 percent advance was not particularly extreme, this progress would push the metal up to its highest level since March of 2008. With gold maintaining its general trend and speculative interests level off, it is a perfect opportunity for arbitrage traders to close the theoretical fair value gap between the two precious metals. As for the COT report, it looked a lot like underlying price action with net longs jumping 29 percent to 44,813.

Spot Gold Chart (Daily)

Chart generated usingFXCM Strategy Trader

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Written by John Kicklighter, Strategist

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